Mortgage Brokers: Do “Middle Men” Increase Costs?

The most important characteristic of mortgage brokers is that they are not employed by the lenders they work with.

They work a little like a grocery store which offers, for example, five different types of bread from five bakeries. The grocery store is not affiliated or controlled by any bakery whose product it offers.

Mortgage brokers, in the same way, offer loan products to customers from a variety of banks.

In exchange for this service, the lender pays them a commission called a “yield spread premium.”

It’s logical that the extra layer between lender and borrower would drive costs up. However, that’s not necessarily the case.

Mortgage brokers reduce the bank’s cost of doing business. In return, the bank gives the broker access to rates and fees that are similar to those a consumer would get by walking directly into a bank.

So whether if you choose a mortgage broker, you don’t automatically pay more. With some good rate-shopping strategies, you can lock in a lower rate with a broker than you would get with a bank.

How Do Brokers Work?

Mortgage brokers help their customers choose the most appropriate product for their needs. They then find the bank that offers the best rate for that loan.

They take the loan application with the borrower and assemble all the supporting documents like pay stubs, bank statements, and a credit report. Then brokers submit the package of documentation to one or more wholesale lenders.

Brokers do not underwrite, approve, or fund home loans. Rather, they submit loans that fit within a particular lender’s approval criteria.

This loosely-affiliated arrangement frees them to work with a variety of lenders and programs.

Advantages Of Mortgage Brokers

For borrowers who don’t drop neatly into a “perfect borrower” box, brokers can be highly beneficial.

They can submit loan packages to banks that are most likely to approve borrowers with a particular scenario. For example, one bank might specialize vacation home buyers, and another in USDA Rural Development loans for first-time home buyers.

But there is a trade-off with the broker model. Mortgage brokers don’t have much control over the speed at which a file is approved, or whether the loan will be approved at all.

It’s the bank’s employees – loan processors, underwriters, and staff – who are in control of the loan once it leaves the mortgage broker’s office. The broker will check status of the loan and work on any issues that arise, but the final decision is with the bank.

Do Banks Offer Fewer Loan Products?

Mortgage bankers are also called direct lenders, because they do not work through intermediaries. Their salespeople may be called loan officers, loan agents, mortgage finance officers, or loan consultants.

These employees typically only sell the products offered by their own company, although occasionally banks can “broker out” the loan to another company if they can’t offer it themselves.

A banker’s range of in-house products is not necessarily that narrow. Mortgage banks offer standard conventional loans, plus government-backed programs like FHA loans, VA, and USDA home loans. In that case, they must comply with established guidelines for those loan types.

In some cases, banks can be even more flexible than brokers. They often create their own products and retain servicing. This means your loan won’t be sold to another bank after it closes.

These so-called “portfolio lenders” can be quite creative with their own programs. For instance, some banks offer portfolio jumbo loans well over $5 million.

Advantages Of Mortgage Bankers

The biggest advantage of mortgage bankers is that your loan officer has more control of the entire process.

If you have a question about a loan you started at a mortgage broker, your rep must contact the bank’s staff to check status. Mortgage brokers usually know exactly who to call, so this may not be a big issue. But a direct lender still has the advantage in this area.

Shop With Both For Best Results

Decide between a mortgage broker or bank the same way you would any group of lenders. Request written quotes from at least one broker and at least one direct lender, then select the mortgage with the best combination of interest rate, cost, and mortgage terms for your situation.

And if one company doesn’t offer the type of loan you are looking for – for instance a 10 year fixed loan or a HARP refinance – then that makes the choice even easier.

What Are Today’s Rates?

Consumers are finding rock-bottom rates at mortgage brokers and bankers across the country. It is an excellent time to shop for a rate.

Get a quote from a few different lenders, and your search can start here. Only a few items are needed to start, and you can have a rate quote in minutes.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.